Of all the Texas Supreme Court decisions issued last week, Fairfield Insurance Co. v. Stephens Martin Paving, LP (04-0728) is arguably the most significant. In that case, the Court answered "no"—sort of—to the Fifth Circuit’s certified question, "Does Texas public policy prohibit a liability insurance provider from indemnifying an award for punitive damages imposed on its insured because of gross negligence?"
More accurately, the Court reframed the question narrowly and answered it this way: "Pursuant to article V, section 3-c of the Texas Constitution and rule 58.1 of the Texas Rules of Appellate Procedure, we answer that Texas public policy does not prohibit coverage under the type of workers’ compensation and employer’s liability insurance policy at issue in this case."
That answer begs the question, "How about other types of insurance policies?" More on that in a minute.
Citing three out-of-state cases, the Court first described a two-step analysis for determining whether exemplary damages are insurable. The Court decides (1) whether the policy’s plain language covers the exemplary damages sought in the underlying suit against the insured; and (2) if so, whether Texas public policy allows or prohibits coverage under the circumstances, considering any express statutory provisions regarding the insurability of exemplary damages.
The Court skipped the first part of its newly announced analytical standard and proceeded to the second step. After reviewing the relevant statutes, the Court concluded that "[t]he Legislature’s expressed intent is that Texas public policy does not prohibit insurance coverage for claims of gross negligence in this context."
That’s it. Certified question answered. Opinion over at page 10, right?
Recognizing "the import of this issue," the Court went on to discuss the "considerations relevant to determining whether Texas public policy prohibits insurance coverage of exemplary damages in other contexts in the absence of a clear legislative policy decision." What follows over the next 17 pages is an impressively researched explication of how every other state has treated the issue, as well as a discussion of key cases outlining both sides of the debate and the critical policy concerns: freedom of contract and whether, based on the specific circumstances, the purpose of imposing exemplary damages is served.
Folks who were hoping for ultimate resolution of whether punitive damages are insurable in Texas are undoubtedly disappointed. Although the Court said more than was needed to answer the Fifth Circuit’s certified question, it stopped well short of adopting a bright-line rule. Indeed, just about everything other than worker’s compensation coverage remains open for further debate under the framework announced in this case.